Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter
Very few companies have the rich history of Hooker Furnishings Corp., an outfit based in Martinsville, Va., that was incorporated in 1924. Founded by one Clyde Hooker Sr., it is now spearheaded by the third generation of the family. As one might expect, this company that designs, manufactures and imports furniture has had numerous ups and downs over its almost century-long history. Benj feels that the future is very promising and recently purchased shares (HOFT-Q) at US$15.51.
One can easily question whether this is the right time to buy. Housing starts are falling, consumers are getting whacked by inflation and paying the grocery bills is more of a priority than enhancing the house. Yes, hotels are also buying Hooker’s products, but many in this sector are still struggling to recover from the pandemic. Perhaps Benj is overreaching with this acquisition where cash on hand has declined from more than US$69-million last year to less than US$12-million today? That is a noteworthy plunge.
Let us look at some numbers, shall we? The company has been profitable in nine of the past 10 years. Revenues last year were US$593.6-million, more than 140 per cent higher than in 2016. The book value is north of US$22, well above the current trading price. Insiders have been buying shares, albeit their holdings register less than 3 per cent. Overall though, it feels like you could buy this firm and comfortably lounge in your La-Z-Boy – although please note this is not a Hooker Furnishings product.
While reclining, enjoy collecting the dividend of 20 US cents a quarter, a yield of almost 5 per cent, while imbibing one of your favourite libations. The dividend is likely secure, but during these times taking that for granted could be foolhardy. The divvie was eliminated before, from 2003 to 2013, a long period for shareholders at the time who expected a payout.
Why has the cash level dropped so much? The primary reason is an increase in inventory of US$56.1-million, of which some has already been sold and is in-transit. There is US$27.9-million available on the revolving credit facility if necessary. Cash was also used on a share buyback plan, with 68,000 shares repurchased last quarter. The average price was US$16.59, near where the stock trades now. That ate into cash to the tune of US$5.9-million.
One good sign for the foreseeable future is that factory production at the company’s Asian suppliers has ramped up to almost full capacity, after taking a beating from that thing called COVID. With manufacturing near optimal production, the weighty backlog can be addressed. This should help to fulfill the desires of independent and department stores, national chains, interior designers, e-commerce retailers and warehouse clubs where Hooker Furnishings provides product.
In the most recent quarter, net income was US$5.5-million, or 46 US cents a diluted share. That was achieved on net sales that decreased slightly, partially because retailers appeared to be overstocked. It seems that situation is being remedied.
From our angle, the stock price has lots of potential upside. Less than two years ago it traded at US$37.50 and in 2017, crested US$50. An upward runway seems quite reasonable with only nominal risk, and excellent reward potential.